Finance & Banking

Last updated: Monday, November 19, 2018

Seeking New Approach for Vietnam Financial Market

Posted: Tuesday, August 28, 2018

Short-term capital accounted for 70 per cent in the financial market, said Deputy Governor of the State Bank of Vietnam (SBV) Nguyen Thi Hong at the Workshop on Restructuring Vietnamese capital and financial markets - From fact to policy at the Capital - Finance Forum held in Hanoi on August 21, 2018. Lack of medium and long-term capital

Pressures on medium and long-term loans remain high and credit institutions face the risk of term differences. As for government bonds, credit institutions still hold more than 80 per cent of bonds.

Affirming that Vietnamese banks lack long-term capital, Fiachra MacCana, Managing Director - Head of Institutional Client Division, Ho Chi Minh City Securities Corporation, said, the capital adequacy ratio (CAR) under the Basel I Standard was between 10 and 16 per cent in 2017 and was hard to apply the Basel II Standard. Mortgage lending increased from US$24.6 billion in 2015 to US$43.8 billion in 2017 but it accounted for only 19.6 per cent of the gross domestic product (GDP). This rate was very low compared to neighbouring countries like Malaysia (42.4 per cent), Thailand (46.8 per cent) and Singapore (54.2 per cent).

Long-term fund is one of the solutions for banks that need to increase their capital base. It also helps commercial banks to offer longer-term mortgage loans. Currently, without sufficient capital, banks are unlikely to provide long-term mortgages of 20-30 years or issue bonds bearing a maturity term of 20 - 30 years. Insufficient fund can be a challenge to the ongoing divestment conducted by State-owned enterprises, he analysed.

Market limitations

Speaking at the forum, Deputy Prime Minister Vuong Dinh Hue said, at present, Vietnam's financial system still has a modest scale in comparison with other countries in the region. Its funding capacity is weak, resulting to its poor function as a funding channel for the economy. The capitalisation from real estate, stock and other markets is limited. The bond structure is unbalanced. The share of short-term capital is high while the share of medium and long-term funds is low, causing the economy to fall short of resources for sustainable development. Capital markets are still heavily dependent on bank credits while credit markets are unstable. The capital flow system is ineffective, reflected by irrational allocation of resources among economic sectors.

According to speakers, constraints of domestic capital - financial markets such as inadequate medium- and long-term capital flows give rise to insufficient resources for business operations. At present, Vietnam still lacks an effective monitoring system to ensure market transparency. The weak legal framework makes the market structure unclear and unstable.

The domestic market lack long-term capital, forcing the financial system to rely on foreign investors. The sale of State interests in State-owned enterprises (SOEs) like Sabeco and Vinamilk is dependent on foreign investors. 53.6 per cent of stake at Sabeco was sold to ThaiBev for US$5 billion in 2017; a 5.4 per cent stake at Vinamilk was offered to F&N for US$247 million in 2016; and 3.33 per cent of its stake was transferred by SCIC to Jardine Cycle & Carriage for US$394 million in 2017.

Solutions

According to Deputy Prime Minister Vuong Dinh Hue, to address the imbalance on the Vietnamese financial market, it is essential to uplift the role of non-banking institutions, such as stock, bond and derivative markets in the foreign exchange market, or funds such as private pension funds.

To expand Vietnam's financial markets to meet sustainable development demands, Mr Ketut Kusuma, Senior Specialist in Capital Markets at the World Bank, said that Vietnam needs to enhance data and information transparency, modernise the legal framework and market infrastructure, and enhance supervisory capacity. For the stock market, it needs to integrate the equitisation of State-owned enterprises into the market development strategy. Meanwhile, the G-bond market should continue to be reformed to join global emerging market indexes.